[Dishaa is a student at Gujarat National Law University, and Krishna is a student at National Law University Jodhpur.]
“We are in the fight for our lives. And we’re losing.” - António Guterres
The 27th Conference of Parties (COP27) served as a significant cautionary signal, reaffirming the urgent need for nations to intensify their efforts in addressing the pressing global challenge posed by the climate crisis. India, the third largest greenhouse gas emitter in the world, has taken several measures to tackle this pressing issue. In 2022, India revised its Nationally Determined Contributions – in line with the ‘panchamrit’ goals proposed at COP26. This included reduction in carbon emissions by one billion tonnes by 2030. At COP27, India submitted its Long Term Low Emission Development Strategy, reiterating reduction in carbon emissions as a major goal.
Against this backdrop, the Energy Conservation (Amendment) Act 2022 (Amendment Act) was enacted by the Indian Government. Amending the Energy Conservation Act 2001 (Act), the Amendment Act emphasizes on decarbonization by empowering the centre to set-up a domestic carbon credit trading policy. In March 2023, the Union Ministry of Power released a draft of scheme, seeking comments from relevant stakeholders.
This article examines the Amendment Act, specifically the Carbon Credit Trading Scheme (Scheme), within the concerns of greenwashing raised during the COP27 as well as the complexity in compliance with this scheme given the bureaucratic jujitsu the Amendment Act and the Scheme creates.
Carbon Credits
Carbon markets follow a cap-and-trade system wherein a cap on emissions is set by a regulator. To emit more than the established threshold, the company/individual needs to purchase a permit from the authority in the form a carbon credit certificate. These carbon credits are permits that allow individuals/companies to emit carbon dioxide over and above the permissible limit set by a governmental/regulatory body. Once a credit is purchased, it can be traded amongst one another, thus establishing a full-fledged carbon market. Each carbon credit is considered equivalent to one tonne of carbon dioxide (CO2). The idea is simple: to make carbon emissions expensive, thereby, disincentivising polluters from exceeding the emission limits.
Source: www.climatepolicyinfohub.eu
There are two broad types of carbon markets – compliance markets and voluntary markets. Compliance markets are mandatory, created out of a national or international regulation while voluntary markets involve carbon credit trade on a voluntary basis.
The Act with Respect to the Scheme
Section 14(w) of the Act empowers the Central Government in India to set-up a carbon trading scheme. The only other aspect of carbon trading dealt with in the Act is that such carbon credit certificates may be issued by the centre or by any authorized agency (under Section 2(da) of the Act). This open-endedness on the scheme has invited a host of concerns. First, no concrete definition of ‘carbon credits’ has been provided, leading to ambiguity in its scope. Second, the discourse abounds with questions regarding the regulation of the market. The Ministry of Power's competence in implementing the scheme is being called into question. Sectors like agriculture and industrial processes, which are significant sources of emissions, presents a complex challenge to the Ministry's capacity to manage and regulate this expanded market. Third, most trading systems are regulated by independent sectoral regulators, e. g. SEBI, CERC, etc. The Act does not afford any clarity on any such body.
Another point of contention is that existing policies such as the Perform Achieve and Trade (PAT) and Energy Saving Certificates, which have also been developed to reduce carbon emissions, may overlap with this scheme under a different name.
Proposed Scheme
The Ministry of Power recently came up with the Scheme, providing some solutions to the concerns raised.
Firstly, there would be compliance and voluntary trading mechanisms. The present PAT scheme would be transitioned into the compliance market, averting the problems of overlapping policies. Other, non-obligated sectors may trade in these credits to meet carbon neutrality goals, constituting the voluntary market. Secondly, an interconnected, cross-sectoral regulatory mechanism has been proposed, under which Indian Carbon Market (ICM) Governing Board is to be set-up, for governing the Indian carbon market. This board shall be chaired by the Secretary for the Ministry of Environment, Forest and Climate Change. The designated authority for issuance of certificates shall also be recommended by this board. The market shall be administered by the Bureau of Energy Efficiency, also serving as the Secretariat of the board. The regulator of trading activities in the carbon market would be Central Electricity Regulatory Commission. It is proposed that the Indian Energy Exchange or Power Exchange India Limited would manage the trading and exchange platform. The Power System Operation Corporation Limited, which currently handles the registry of renewable energy credits, could continue to be responsible for the ICM registry.
Source: Draft Carbon Market Policy
While the Scheme could be deemed as a commendable effort at establishing a carbon market for India, the governance structure could be a matter of concern. Extremely complicated structures like such pose threats in the form of bureaucratic hurdles and reduced efficiency. The multi-tiered nature could also make it susceptible to clashes between the different organs, especially between the administrator and regulator.
The biggest question that remains however, is whether this concept of carbon market is actually beneficial or is merely a greenwashing gimmick.
Greenwashing: The Gordian Knot of the Carbon Credits
As the UN task force headed by Catherine McKenna was formed to revisit the standards and practices required for private sector entities to comply with, in order to make sure they fulfil their net zero pledges, a recommendation from this task force also states that there must be less reliance placed on carbon offsets via carbon trading. However as seen in COP-27, more emphasis was laid on negotiating standards for global carbon credit rating markets pushed by John Kerry, the United States Envoy on Climate Change by pushing a new two-tier for carbon offset reading through the system of mitigating contributions. One of the concerns raised, especially by small island nations, is aptly summed up in Matt William’s (the head of the London-based Energy and Climate Intelligence Unit) remark which reads as follows:
"If they (mitigating contributions) are used by the private sector as offsets, we might kid ourselves we’ve achieved net zero when we haven’t by any stretch.”
The underlying premise is the problem of what climate scientists associate carbon credits with - greenwashing.
Defined first in 1986 by climate scientist Jay Westerveld, greenwashing is when a business or group spends more resources on portraying itself as environmentally friendly than on actually reducing its negative impact on the environment. Companies mainly engage in Greenwashing due to either increased customer perception (especially among Gen Z users) of the company’s operations being ethical when they comply by sustainability standards as pointed in this recent Nielson’s Global Corporate Sustainability Report or because of sheer ignorance and lack of technical know-how.
Carbon credits or offsets manifest this process of greenwashing when businesses double count carbon credits, neglect to prioritise internal emissions reduction, or purchase unverified credits. A case in point of double counting of carbon credits wherein both the company as well as the government account for the offset leading to two entries is as seen in the case of the Environmental Défense Fund Report. Examples of non-prioritising internal emissions can be seen in the case of the Virgin Atlantic’s Oddar Meanchey program which though promoted afforestation practices, had engaged in more deforestation that the emissions which were reduced through these carbon credits reversed.
There are essentially three levels of greenwashing: (a) zero-level greenwashing; (b) moderate-level greenwashing; and (c) severe-level greenwashing. While zero and moderate level greenwashing have some effect on reducing carbon emissions, greenwashing of a severe level has the complete opposite consequence.
International Perspectives
It is important to look at certain foreign experiences to learn drawbacks seen in other carbon credit regimes. A study commissioned by the European Union in 2016 showed that 3/4th of UN-offset projects were unlikely to result in actual carbon emissions reduction despite the purchase of more carbon credits. Similarly, as seen in Australia, providing carbon credits to heavy carbon emitting industries like landfill gas industries, there was alleged misuse of carbon credit offsets which could have been regulated through other deterrent legislative measures.
Both the Amendment Act and the Scheme do not incorporate the challenges of greenwashing as a phenomenon that come along with the tide of introducing the carbon credit trading policy. Moreover, the current policy scheme which can be seen as an extension of the PAT scheme allows for carbon credit offsets even in cases energy intensive industries which could otherwise be regulated through deterrence rather than incentivization. The Scheme lists obligated sectors to include petroleum refineries, iron and steel, fertilisers, and chlor alkali which, according to the International Economic Agency, contribute 7-9% of carbon emissions even in developed countries in spite established carbon credit offset norms.
Conclusion
Therefore, as seen from above, the ICM could be a ‘bane’. To transform this into a boon, the following is proposed. Firstly, the intricate governing structure holds potential to be simplified. One viable approach would be to establish a sole regulator similar to the Securities and Exchange Board of India, which would entail regulation as well as administration. Secondly, the problem of greenwashing needs to be tackled. A first plausible approach would be to look at carbon credits as supplements to more deterrent control measures such as carbon taxes or emission regulating legislations, rather than looking at them as the main measures of emission control. However, if the policy discourse is to be carbon credit centric, a second plausible approach is to ensure that high-emission sectors undertake zero-to-moderate level greenwashing by adopting a carrot and stick model - enforcing strict laws to reduce emissions at source as well as incentivising them to participate in the carbon market to offset the remainder of emissions. Finally, along the lines of legislation proposed by the European Commission, a transparency and accountability mechanism must be established to put an end to greenwashing tactics. Companies that would make claims of carbon neutrality must report to the regulator about actual efforts to reduce emissions and their use of carbon offsets, with the regulator being in charge of inspections.